4. Suppose you have just paid a nonrefundable fee on $1000 for your meal plan fo

Question

4. Suppose you have just paid a nonrefundable fee on $1000 for your meal plan for this academic term. This allows you to eat dinner in the cafeteria every evening. a. You are offered a part-time job at a restaurant where you can eat for free each evening. Your parents say that you should eat dinner in the cafe anyway, since you have already paid for the meals. Are your parents right? Explain, why or why not. b. You are offered a part-time job at a different restaurant where, rather than being able to eat for free, you receive only a large discount on your meals. Each meal would cost you $2; if you eat there each evening this semester, it will add up to $200. Your roommate says you should eat in the restaurant since it costs less than $1000 that you paid for the meal plan. Is your roommate right? Explain why or why not.

Explanation / Answer

a.No your parents are wrong as they considering sunk costs. Since $1000 that you have paid already for the meal is not refundable. Since both the cafeteria meal and a restaurants meal are free you must to decide where should eat that gives you benefit.

b. your roommate is not right, since $1000 is nonrefundable, it should not enter into your decision making. You may decide to eat in restaurant if it give you at least $2 benefit greater than choosing to eat in cafeteria.

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